The first half of 2022 was the worst first half of a year for the S&P 500 since 1970! There were a lot of factors contributing to that dour start. Collectively, they could be boiled down to one thing: growth concerns.
The market was looking ahead to a period of lower economic growth and lower earnings growth, while providing some added allowance for a potential recession and actual decline in earnings growth. Accordingly, there was some significant multiple compression as investors doubted the achievability of prevailing earnings growth estimates.
These were all headwinds that the market had to contend with during the first half of the year. But there were also some more immediate issues at play.
For one, the first quarter was plagued by a winter storm that disrupted supply chains and hurt economic activity. Then, in the second quarter, inflation fears gripped the market as bond yields spiked higher.
Fortunately, these issues appear to be abating, and the market has started to rebound. The S&P 500 is up 5% from its lows in late June, and earnings estimates for the second half of the year have been revised higher.
If this trend continues, the market is likely to continue to recover and move higher over the remainder of the year. But there are still some significant risks that could trip up this recovery, so investors need to remain cautious.
Next week is going to be a big one for the markets, with earnings reports from Apple, Amazon, Meta and Alphabet all due out. There’s a lot of anxiety and nervousness around these reports, given the recent volatility in the markets.
The FOMC statement is also due out on Wednesday, July 27th, and it’s expected that at least 75 basis points will be hiked in the fed funds rate. This, combined with the first look at Q2 ’22 GDP on Thursday morning, July 28th, could mean big swings in the markets next week.
So it’s definitely a week to watch for any clues about where the economy is headed.
The Hot Zone this Week
The Federal Reserve’s decision on interest rates is always one of the most anticipated events on the economic calendar. The current rate is 1.625% and the projected rate increase will be to 2.375%. This decision will have a major impact on the economy and everyone should pay close attention to it.
Global Spotlight
President Joko “Jokowi” Widodo’s upcoming visit to Beijing is an important opportunity for Indonesia and China to reaffirm their commitment to strengthening bilateral ties. The two countries have a long history of economic and cultural cooperation, and this visit will serve to further cement those bonds.
During his meeting with Chinese President Xi Jinping, Jokowi is expected to discuss a range of issues of mutual concern, including the South China Sea dispute, counterterrorism, and economic cooperation. The two leaders are also likely to discuss ways to further expand bilateral trade and investment.
The U.S. economy is on the brink of a technical recession, with negative growth expected in the second quarter. The consensus among economists is that the United States will avoid negative growth, but the Atlanta Fed’s GDPNow model predicts that the economy will contract by 1.6% in the second quarter. If this prediction proves true, the United States will be in a technical recession, having had two consecutive quarters of negative growth. Mauldin says that while the U.S. economy is not currently in a recession, it is “teetering on the edge.” He predicts that if the second quarter GDP data shows negative growth, the Fed will respond with more quantitative easing, which will ultimately lead to inflation. Mauldin advises investors to protect themselves against inflation by investing in gold and other precious metals.
French President Emmanuel Macron will make his first trip to sub-Saharan Africa since his reelection in April 2022, visiting Cameroon, Benin and Guinea-Bissau on July 25-28. This will be his first time visiting the region as president, though he has made several trips to Africa as a presidential candidate and head of state.
Tunisians will go to the polls on July 25 to vote in a constitutional referendum that could see the country change from a parliamentary to a presidential system.
The current Tunisian constitution, which was adopted in 2014, provides for a balance of power between the president and parliament. Parliament is responsible for passing laws, while the president has the power to veto legislation.
The proposed constitutional changes would increase the president’s power, giving him the authority to appoint the prime minister and cabinet, as well as control over foreign and security policy.
Stratfor.com
Economic Calendar
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Briefing.com
Last Weeks Numbers
It was a good week for stocks overall, despite Friday’s pullback. However, the outlook for the economy is not as rosy.
Specifically, the July NAHB Housing Market Index fell to 55 from 67, registering its biggest monthly drop on record outside of the drop seen in April 2020. Additionally, June housing starts were weaker than expected, and building permits (a leading indicator) for single-unit dwellings fell in every region.
Existing home sales were also weaker than expected in June and declined for the fifth straight month. Finally, initial jobless claims topped 250,000 for the first time since mid-November 2021.
All of these data points point to a weakening economy, which is likely to put pressure on stocks in the days and weeks ahead. investors should be cautious and monitor these data points closely.
Review Last weeks numbers here.
Earnings
The quarterly earnings season is underway, and the early results are in. The estimated earnings growth rate for the S&P 500 for 22Q1 is 11.3%. If the energy sector is excluded, the growth rate declines to 5.2%.
The S&P 500 expects to see share-weighted earnings of $453.1B in 22Q1, compared to share-weighted earnings of $407.2B (based on the year-ago earnings of the current 504 constituents) in 21Q1.
This quarter’s results are being driven by a number of factors, including strong growth in the tech sector and higher energy prices. Let’s take a closer look at the numbers.
Of the 495 companies in the S&P 500 that have reported earnings to date for 22Q1, 77.4% have reported earnings above analyst estimates. This is a strong showing, and suggests that analysts may have been too pessimistic in their predictions.
The energy sector has been a major contributor to earnings growth this quarter, thanks to higher oil and gas prices. Excluding the energy sector, the overall growth rate for the S&P 500 declines to 5.2%.
The tech sector has also been a major driver of earnings growth, with companies like Apple, Microsoft, and Amazon all posting strong results. The strength of the tech sector is likely to continue driving earnings growth in the quarters to come.
Overall, the results of this quarter’s earnings season have been positive, with most companies reporting better-than-expected results. The strong performance of the tech sector is especially encouraging, and suggests that the S&P 500 is on track for continued growth in the quarters to come.
Source I/B/E/S data from Refinitiv
Please share this information with your colleagues and friends to help them make sound investment decisions. If you have any questions, please don’t hesitate to reach out to us for more information.
